DCIT, BANGALORE vs. M/S DECCAN CREATIONS PRIVATE LIMITED, BANGALORE

Appellant By : Shri Sunil Kumar Agarwala, JCIT (D.R) Respondent By : Shri P. Dinesh, Advocate. Date of Hearing : 23.09.2015. Date of Pronouncement : 28.10.2015. O R D E R Per Shri Jason P. Boaz, A.M. : This appeal by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-I, Bangalore dt.25.7.2013 for Assessment Year 2010-11.

The assessment was completed under Section 143(3) of the Act vide order dt.26.11.2012 wherein the income of the assessee was determined at Rs.3,74,57,835 in view of the following additions/disallowances :- (1) Disallowance u/s.40(a)(ia) : Rs.21,22,336. (2) Software Expenses disallowed : Rs.3,25,019. 2.2 Aggrieved by the order of assessment at 26.11.2012 for Assessment Year 2010-11, the assessee preferred an appeal before the CIT (Appeals) – I, Bangalore. The learned CIT (Appeals) vide order dt.25.2.2013 allowed the assessee's appeal by deleting the aforesaid two disallowances at (1) and (2) (supra).

1. The order of the learned CIT (Appeals), in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case.

2. The CIT (Appeals) erred in not appreciating the facts that the payments made by the assessee company to Markus Roland and Elisabetta Guidi of Austria and Italy respectively are of the nature of technical services rather than commission and therefore require that tax be deducted under Section 195 of the IT Act.

3. The CIT (Appeals) erred in deleting the disallowance of Rs.21,22,336 under Section 40(a)(i) relating to the payments following the decision of the Delhi High Court in the case of Van Oord ACZ India (P) Ltd. V CIT (2010) 323 ITR 130 without appreciating the fact tht at according to section5(2)(b) total income includes income deemed to accrue or arise in India and the source of such payment being in India and the source rule reigning over the situs rule the sum is chargeable under the provisions of the Act and that the decision relied upon is not applicable to the facts of the case.

4. The CIT (Appeals) erred in deleting the addition of software expenses without appreciating the fact that the assessee had entered into a contract for development of customized ERP and other production software as per note filed on 30.10.2012 before the Assessing Officer during the course of assessment proceedings and also submitted by the AR vide letter dt.30.12.2012 and reproduced in para 4.3 of the appellate order indicating that the expenditure was of capital nature.

5. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored.

6. The appellant craves leave to add, to alter, to amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”

4. The Grounds at S.Nos.1, 5 & 6 are general in nature and therefore no adjudication is called for thereon.

5. Grounds No.2 and 3 – Non-Deduction of Tax at Source. 5.1 In Grounds at S.Nos.2 and 3, Revenue submits that the learned CIT (A)’s order was erroneous in deleting the disallowance ofRs.21,22,336 under Section 40(a)(i) of the Act, made by the Assessing Officer, in respect of the payments made to Markus Roland of Australia and Elisabetta Guidi of Italy, by following the decision of the Hon'ble High Court of Delhi in the case of Van Oord ACZ India (P) Ltd. (2010) 323 ITR 130 which is not applicable to the facts of the case on hand. It is contended that in doing so, the learned CIT (Appeals) had failed to appreciate the fact that according to section 5(2)(b) of the Act, total income includes income deemed to accrue and arise in India and the source of the payments to the above two persons, being in India, the same is chargeable under the Act as they perform activities/services rendered that are in the nature of ‘technical services’ rather than ‘commission’ and therefore require that tax is to be deducted thereon under Section 195 of the Act.

5.1.2 The learned Departmental Representative drew the attention of the bench to the order of assessment at paras 3.1 to 3.6 wherein the Assessing Officer has dealt with this issue. It was submitted that the Assessing Officer, after examining the issue, was of the view that the payments made to the above two persons was for activities performed which were in the nature of ‘technical services’ rendered and therefore tax thereon ought to have been deducted under Section 195 of the Act and disallowed the same under Section 40(a)(i) of the Act since the assessee had failed to deduct tax at source on such payments. The learned Departmental Representative strongly contended that the learned CIT (Appeals) while deleting the disallowance under Section 40(a)(i) had failed to examine and adjudicate on the basic question of whether or not the payments made to the aforesaid two parties are in respect of services rendered that were in the nature of fees for technical services. The learned Departmental Representative pleaded that in view of the above submissions, since it is clear that the learned CIT (Appeals) has failed to adjudicate on the issue of whether the fees paid for services rendered by these two persons was commission’ or in the nature of fees for technical services on which TDS was to be made under Section 195 of the Act, the order of the learned CIT (Appeals) on this issue be set aside and the matter be restored for adjudication. 5.2 Per contra, the learned Authorised Representative supported the finding of the learned CIT (Appeals) in the impugned order on this issue. He, however, fairly concluded that there is no objection if the matter is set aside to the file of the learned CIT (Appeals) for adjudication since the learned CIT (Appeals) had failed to adjudicate on the issue of whether the said payment were for services performed which were ’technical in nature’ on which TDS under Section 195 of the Act was required as held by the Assessing Officer. 5.3 We have heard both the learned Departmental Representative for Revenue and the learned Authorised Representative for the assessee on this issue and perused and carefully considered the material on record. As contended by Revenue and as concluded by the learned Authorised Representative of the assessee, we find, from a perusal of the relevant portions of the impugned order of the learned CIT (Appeals) and the order of assessment, that the learned CIT (Appeals) had in fact not adjudicated on the Assessing Officer’s finding that the payments made by the assessee to Markus Roland of Austria and Elisabetta Guidi of Austria, though termed as ‘commission’ were in fact for services rendered which were in the nature of fees for technical services, that required taxes were to be deducted thereon under Section 195 of the Act and the assessee's failure to do so had resulted in the same payments being disallowed under Section 40(a)(i) of the Act. In the above factual matrix of the case, we set aside the finding of the learned CIT (Appeals) in deleting the disallowance under Section 40(a)(i) of the Act and restore to the file of the learned CIT (Appeals) for adjudication, the issue of whether or not the payments made by the assessee to the aforesaid two parties was in the nature of fees for technical services rendered, the applicability of sections 195 and 40(a)(i) of the Act rather than as ‘commission’ payments claimed by the assessee. Needless to add both the Assessing Officer and the assessee are to be afforded adequate opportunity to furnish details, submissions, etc. before the learned CIT (Appeals) adjudicates the matter. It is ordered accordingly. Consequently, Revenue’s grounds at S.Nos.2 and 3 are allowed for statistical purposes. 6.0 Ground No.4 : Software Expenses. 6.1 In this Ground, Revenue contends that the learned CIT (Appeals) erred in deleting the disallowance / capitalization of software expenses, without appreciating the fact that the assessee had submitted before the Assessing Officer that these items were purchased as per a contract for development of customized ERP and other production software. The learned Departmental Representative further contended that even as per the assessee’s submissions before the learned CIT (Appeals), recorded at para 4.3 of the impugned order, it clearly indicates that these expenses are capital in nature. It was further submitted that in holding that the software expenses were revenue in nature, the learned CIT (Appeals) had failed to examine either the contract entered into by the assessee for development of customized ERP and other production software or the concerned invoices. It was strongly pleaded by the learned Departmental Representative that in the above factual matrix, this issue requires re-examination and fresh adjudication by the authorities below after examining the concerned contract documents and corresponding invoices.

6.2 Per contra, the learned Authorised Representative supported the finding of the learned CIT (Appeals) in the impugned order that the software expenses were actually revenue in nature. However, the learned Authorised Representative on being called upon, failed to place before us copy of the assessee’s contracts for development of customized ERP and production of systems along with copies of corresponding invoices to establish whether the said expenditure was capital or revenue in nature. In the light of the above, the learned Authorised Representative for the assessee submitted that they had no objection if the matter was restored to the file of the learned CIT (Appeals) for examination and adjudication on the issue of whether the software expenses incurred were capital or revenue in nature and submitted that all concerned contracts, invoices and other details required in this connection would be placed before the authorities below for examination. 6.3 We have heard both the learned Departmental Representative for Revenue and the learned Authorised Representative for the assessee and perused and carefully considered the material on record. As contended by Revenue, it appears that the learned CIT (Appeals), while ascertaining whether the explanation incurred on software was capital or revenue in nature and in coming to the finding that the said expenditure is revenue in nature has not examined the basic documents of the contract for development of customized ERP and other production systems concerned invoices etc. Admittedly, in appellate proceedings, the learned Authorised Representative of the assessee was unable to submit the same for our perusal and examination. In this factual matrix, we are of the considered view that since the above documents have not been examined by the learned CIT (Appeals) while holding expenditure incurred on software to be revenue in nature, the finding / order of the learned CIT (Appeals) is to be set aside. We, therefore, restore to the file of the learned CIT (Appeals) the issue of examination and adjudicating the issue of whether the expenditure incurred on purchase of software is capital or revenue in nature after examining the contract documents for development of ERP and other production systems, the accompanying / relevant invoices, etc after affording both the Assessing Officer and the assessee adequate opportunity of being heard and to file details, documents and submissions in this regard. It is ordered accordingly.